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Thursday, June 30, 2016

Global Markets Continue to Recover

Charles Schwab: On the Market

Posted: 6/30/2016 4:15 PM ET

Global Markets Continue to Recover

U.S. equities were again solidly higher, joining their foreign
counterparts in recovering from the post-Brexit malaise, amid signals of
further stimulus measures from the Bank of England, and despite a halt
in crude oil's latest march upward. Equity news was a mixed bag,
headlined by the results of the Fed's stress test results of the banking
sector, as well as confirmation from Hershey that Mondelez offered to
acquire the chocolatier, notwithstanding its solid rejection of the
offer. Treasuries finished higher amid a rise in jobless claims and a
strong regional manufacturing activity report, while the U.S. dollar and
gold were higher.

The Dow Jones Industrial Average (DJIA) rose 235 points (1.3%) to
17,930, the S&P 500 Index gained 28 points (1.4%) to 2,099, and the
Nasdaq Composite added 63 points (1.3%) to 4,843. In heavy volume, 1.3
billion shares were traded on the NYSE and 2.1 billion shares changed
hands on the Nasdaq. WTI crude oil fell $1.55 to $48.33 per barrel and
wholesale gasoline was $0.04 lower at $1.50 per gallon, while the
Bloomberg gold spot price gained $2.65 to $1,321.80 per ounce.
Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major
world currencies—was 0.3% higher at 96.04.

After a halt in trading of its shares, Hershey Co.
(HSY $114) resumed trading and finished solidly higher, after it issued
a press release that confirmed reports that it received a preliminary,
non-binding indication of interest from Mondelez International Inc.
(MDLZ $45) to acquire the chocolate maker for $107 per share, in a
50/50 cash and stock transaction. Hershey also said that after careful
consideration, as well as consultation with its management and outside
financial and legal advisors, the company's board rejected the proposal
in a unanimous decision, and said it provided no further bass to
continue talks between it and MDLZ. Shares of MDLZ were also higher.

Darden Restaurants Inc.
(DRI $63) announced fiscal 4Q earnings of $1.10 per share, one penny
north of estimates, with revenues rising 2.1% y/y to $1.8 billion, after
excluding the impact of an extra week of sales in the prior year,
roughly in line with forecasts. The parent of Olive Garden said its
adjusted same-restaurant sales increased 2.6% y/y, slightly below the
expected 2.7% gain. DRI issues softer-than-expected full-year guidance,
while raising its quarterly dividend by 12% to $0.56 per share. DRI
traded solidly lower.

Lions Gate Entertainment Corp. (LGF $20) announced an agreement to acquire Starz
(STRZA $30) for $32.73 per share in cash and stock, valued at about
$4.4 billion. Shares of LGF lost ground, while STRZA was higher.

Financials were in focus after the Federal Reserve announced the results
of its second round of stress tests of the sector, objecting to only
two capital plans of the thirty-three banks that were tested. The Fed
noted that it objected to plans submitted by Deutsche Bank Trust Corp and Santander Holdings USA Inc. Moreover, while the Fed did not object to Morgan Stanley's
(MS $26) plan, it is requiring the firm to submit a new capital plan by
the end of 4Q 2016 to address certain weaknesses in its capital
planning processes. Shares of MS finished slightly higher. For more on
the financial sector see Schwab's Director of Market and Sector
Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Financials: Danger or Opportunity?, at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Jobless claims rise, while regional manufacturing activity jumps

Weekly initial jobless claims (chart)
rose by 10,000 to 268,000 last week, versus the Bloomberg estimate
calling for claims to increase to 267,000, as the prior week's figure
was downwardly revised by 1,000 to 258,000. The four-week moving average
was unchanged at 266,750, while continuing claims fell by 20,000 to
2,120,000, south of the estimated level of 2,151,000.

The Chicago Purchasing Managers Index (chart)
snapped back into expansion territory (above 50), jumping to 56.8 in
June—the highest since January 2015—from 49.3 in May, and versus
expectations of a modest rise to 51.0. New orders and production both
improved month-over-month, while employment declined.

Regional manufacturing reports for June have mostly signaled expansion,
ahead of tomorrow's reads on national manufacturing activity in the form
of the ISM Manufacturing Index and Markit's Manufacturing PMI Index, with both forecasted to show 51.3 levels and denote expansion. As noted in the Schwab Market Perspective: British Shock—What's Next,
the U.S. economy is fairly healthy and should manage to stay out of
recession territory in the near term, although risks have risen. The
corporate side of the U.S. private sector continues to struggle to gain
momentum, and manufacturing continues to flirt with contraction. The
uncertainty associated with Brexit has caused the U.S. dollar to surge
again and could exacerbate the manufacturing sector’s problems at least
in the short-term. Read more at www.schwab.com/marketinsight. The other item on tomorrow's economic calendar is construction spending, forecasted to have risen 0.5% m/m during May after declining 1.8% in April.

Treasuries finished higher, as the yield on the 2-year note dropped 5
basis points (bps) to 0.59% and the yield on the 10-year note dipped 3
bps to 1.48%, while the 30-year bond rate was 2 bps lower at 2.30%. Bond
yields remain above the lows hit in the aftermath of the U.K. Brexit
vote and Schwab's Chief Fixed Income Strategist, Kathy Jones offers
analysis in her recent article titled, Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

Please note: The bond markets will close early tomorrow at 2:00 p.m. ET in observance of the upcoming July 4th holiday.

Europe continues rally as Brexit fallout eases, Asia mostly higher

The European markets finished higher, adding to their three-day rally,
despite a pullback in crude oil prices from their recent jump, while the
markets continue to recover from the fallout from last week's vote in
the U.K. to leave the European Union. Stocks got an intra-day boost and
the British pound and euro both fell as Bank of England Governor Carney
said the central bank will likely need to deploy stimulus measures in
the wake of the Brexit vote. For deeper analysis of the impact of the
Brexit vote, see the Schwab Center for Financial Research's recent
article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight and
be sure to check out the video from Schwab's Managing Director of
Trading and Derivatives, Randy Frederick and Schwab's Chief Global
Investment Strategist, Jeffrey Kleintop, CFA, titled Brexit Aftershock: When Will the Markets Calm Down?, at www.schwab.com/insights. Follow Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop.
U.K. political uncertainty ramped up, exacerbated by the announcement
from former London Mayor Boris Johnson that he will not run to become
the U.K.'s next prime minister. Bond yields in the region were mostly
lower. Financials lagged the broad-based advance after the U.S.
subsidiaries of Deutsche Bank AG (DB $14) and Banco Santander SA
(SAN $4) failed the Federal Reserve's stress tests. In economic news,
the eurozone consumer price inflation estimate came in slightly hotter
than expected for June.

Stocks in Asia finished mostly to the upside to conclude a mixed quarter
in the region, on the heels of yesterday's continued recovery in the
U.S. and Europe from last week's U.K. Brexit vote shock. Japanese
equities ticked higher, though some late-day strength in the yen capped
gains, along with a preliminary report showing the nation's industrial
production fell more than expected in May. Mainland Chinese issues
ticked slightly lower, while those traded in Hong Kong jumped, as did
markets in Australia, with healthcare, oil & gas and financial
issues leading a broad-based advance. South Korean stocks rose on the
heels of a much stronger-than-expected May industrial production report,
and Indian securities moved higher, to complete its best quarter since
2014, bolstered by eased U.S. rate hike concerns and the Brexit
recovery, along with recent measures by the government to bolster the
economy. Schwab's Director of International Research, Michelle Gibley,
CFA, offers a look at the global political landscape in her article, Performing Reformers: How Political Change Can Affect Stocks, at www.schwab.com/oninternational, and be sure to follow Schwab on Twitter: @schwabresearch.

A slew of economic data from the Asia-Pacific region will dominate
tomorrow's international calendar, with items scheduled for release to
include CPI, personal income, consumer confidence, wage data and the
Tankan Index from Japan, CPI from South Korea, and trade figures from
China. In addition, the manufacturing PMIs for the Asian nations will be
reported, along with those of most of the European countries, while
from across the pond will come PPI from the Eurozone and housing data
from Italy.

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